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Unformatted text preview: Economics 160 Name:
Money and Banking Spring 2002 Dean Balm, Instructor Midterm Examination
Wane 1. Place your name on this and all pages. 2. This examination consists of 4 sections and is worth 100 points. The distribution of
points is as follows: §1 ........ T/F 15 questions @ 2 points ............ 30 §2 ........ Multiple Choice 10 questions @ 4 points 40 §3........Mandatory Essay 1 question ........... 20 §4 """" MW
TOTAL ...................................... 100' 3. You will be allowed until 3:15 to complete the exam. 4. If additional space is necessary use the back of the page and label your answer. 5. Show all your work on problems” Incorrect answers supported by clear and
substantially correct work will receive partial credit. Correct answers unsupported
by work will receive surprisingly little credit. 6. Place all your answers on the answer sheet. Only responses on the answer sheet will
be graded. 7. GOOD LUCK“ Page 2 of 4 Name: §1—True/ False—(2 points each) Indicate if the following statements are true, false by
circling either‘T or F on your answer sheet. 1. Once a component of a monetary aggregate has been classiﬁed as a part of M1, M2,
or M3, it never will be reclassiﬁed to a different monetary component because it
would create too many data gathering complications. 2. Inﬂation reduces economic efficiency to the extent that it induces people to resort to
barter. 3. Those economies where the money supply has grown the most have experienced the
greatest degree of inﬂation. 4. A bond owner who bought a bond when thermarket interest rate was 4% will prefer
the market rate rises to 5% before she sells her bond. 5. The thrust of the de-regulation of the 19805 reduced the times the government used
regulation of the ﬁnancial markets and institutions to advance social goals. 6. Financial markets, and the institutions that operate in them, add to the well being
of society even though they only allocate purchasing power from people with excess purchasing power to those with excess spending opportunities at the current market
rate of interest. 7. Financial intermediaries, such as banks, allow those with small amounts to save for
relatively short periods of time to lend to borrowers who want to borrow large
amounts for long periods of time. 8. Total risk (signiﬁed by U) and asset demand are inversely related.
9. The real rate of interest is not the same thing as the rate of return on an asset. 10. The expected return on the market is 14%. An asset with a B=1.5 will have an
expected return of 21%. 11. Because treasury bills are risk-free assets, the demand for treasury bills is not
affected if the relevant risk of stocks becomes less. 12. If bond issuers believe that there will be more inﬂation next year, but bond buyers
think inﬂation will not increase over the current levels, nominal interest rates will
rise, and more bonds will be traded than if both issuers and buyers thought the
inﬂation rate would be unchanged. 13. When the liquidity effect is stronger than the income and price effect, an increase in
the growth rate of the money supply will cause the market interest rate to decline. 14. A bank that faces a 5% required reserve ratio has $6 million in reserves to support
its $100 million in assets. If the bank has $1 million of deposits withdrawn it must
ﬁnd additional reserves, by selling assets or borrowing funds, to meet its reserve
requirements. 15. A consumer who pays cash for her purchase does not incur an interest cost. Page 3 of 4 Name: §2—Multiple Choice Circle the single best alternative on your answer sheet. (four points
each). 1. Roger deposits a $500 check into his money market account. This will:
a. decrease M1 and increase M2 and M3
b. decrease M1 and keep M2 and M3 unchanged.
c. decrease both M1 and increase M2, but keep M3 unchanged.-
d. none of the above are correct. 2. Which of the following is true regarding money’s store of value function?
a. money is the only store of value available. b. money does not allow a person to hold purchasing power from the time
income is earned until it is spent. c. money is superior to all other stores of vlaue during periods of inﬂation.
d. money is the most liquid store of value available. 3. A 5% coupon bond that matures in three years with a face value of $1,000. If the
bond is currently selling for $925, what is true of the market interest rate. a. the market interest rate is below 5%. b. the market interest rate is above 5%. c. the market interest rate is equal to 5%. d. you need to know the inﬂation rate in order to answer this question. 4. The major function of ﬁnancial intermediation in a market economy is to:
a. enrich lenders by increasing their returns net of search costs.
b. enrich borrowers by reducing their costs of funds.
c. enrich banks by increasing their profits.
d. move financial resources to their most highly valued uses.
e. extend the power of the regulatory authorities. 5. Which of the following is not a function of money?
a. Money serves as a unit of account. b. Money serves as a medium of exchange.
c. Money serves as a store of value. d. Money serves as a source of income. e. All of the above are functions of money. 6. If prices rise at a faster than expected rate:
a. real interest rates will be higher than expected.
b. nominal interest rates will fall. c. debtors will be repaying loans with dollars that are worth less than
expected. d. it will have no economic impact, because it was unexpected. Page 4 of 4 Name: 7. If the expected return on AMF stock falls from 13% to 10% while the expected
return on IBM stock remains unchanged (at 9%), then the expected return from
holding IBM stock relative to AMF stock and the demand for IBM
stock . The words which will correctly complete this sentence are: a. increases, decreases, respectively.
b. decreases, increases, respectively.
c. increases, increases, respectively.
d. decreases, increases, respectively. 8. The number of gold coins that investors will want to hold rises when (everything
else held constant): a. stocks become less costly to buy and sell because of technical innovations.
b. people expect a boom in real estate prices. c. Treasury securities become riskier because interest rates are more volatile.
d. investors suffer a signiﬁcant loss in income. 9. A stock with a high variance to its returns must:
a. have a higher relevant risk.
b. pay a higher expected return than an asset with a low variance returns.
c. have a higher standard deviation than an asset with low variance returns.
d. none of the above are correct. 10. A bank that has most of its assets in reserves can: a. make a higher income than a bank with a small amount of reserves.
b withstand large withdrawals c. borrow easily for any reserves it might need that night.
d. none of the above are correct. N amez—L
Economics 160 First Exam 7 Spring 2002 Answer Sheet
Privacy Box: I: This here is a privacy box. If you would like your exam returned directly to
you, and not left in alphabetical order for you to pick up on stage before
class, then check this box. If you check the box, you will only be able to pick
u the midterm durin ofﬁce hours (Wednesda s and Frida s 12:30—lz30). Honesty Box
When you have ﬁnished the exam, please read the following pledge. If it applies to you, ‘
please complete the pledge by signing your name. If you can not do so honestly, then J
leave it blank and a score of ”0” will be assigned to this exam, but no other sanctions will
be imposed. If, however, you sign the pledge and it is determined that the pledge is not
applicable the maximum sanctions possible will be pursued.
On my honor, I have neither given nor received unauthorized aid in this
exam. Signed: §1 True False In the following spaces, circle whether you think the corresponding statement is true or
false. (two . ints each) §2 Multiple Choice
In the following spaces circle the alternative that represents the single best alternative
for the corres . undin multi le choice examination. Economics 160, Money and Banking Name:
First Examination Spring 2002 Answer Sheet §3—Mandatory Essay Question: You must answer all questions in this section. 3.1
One of the characteristics of banks in both China and Japan is that the institutions are
carrying lar e amounts of non-performing debt. a. In t e space below create a balance sheet for a bank with the following
entries. Be sure to include bank capital. Deposits =¥250 billion; Reserves
¥10 billion; Borrowings =¥150 billion; Loans=¥230 billion; Securities=¥185
billion (three points) b. If the bank is holding no excess reserves, what is the required reserve ratio?
Defend your answer with an explanation. (three points) rt iiikﬁé {12.14)}: it-Lu' t 'L ('31 ' ‘f‘ C ’3
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First Examination Spring 2002 Answer Sheet c. Recreate the balance sheet you had as an answer to 3.1a in the space below.
Show what will happen to the balance sheet if the bank is forced to write off ¥30billion in bad loans. (four points) 191.44., 3 '5 («7. t) ::£/// sang - L y _
\‘JL Lt/M / d. Recreate the balance sheet you had as an answer to 3.1a in the space below.
Show what will happen on the balance sheet if the bank exchan es its ¥30
billion in bad loans for ¥30billion in government bonds, which e
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First Examination Spring 2002 Answer Sheet e. Compare the consequences on the bank’s ability to survive of the policies
represented in part ”c” and in part ”d"? (ﬁve points) -/ 1 H I /4 f i 1/: _. 5 Z" /, ’ I: -7, /
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First Examination Spring 2002 Answer Sheet §4——Choice Essay Question: Answer one of the following two essay questions. If you
answer both, only the ﬁrst answer will be graded. (ten points) 4.1 Gambling chips from Las Vegas casinos are sometimes not cashed in at the casinos, but are used to pay for purchases in Las Vegas. These chips circulate through the
merchants in Las Vegas as they are given in change and then respent, etc. a. How do these gambling chips in this situation take on the characteristics of
money? (four points) b. How is it to the casino’s advantage that the chips circulate, and are not
cashed in for sometime? (six points) 4.2 In an attempt to increase the level of economic activity in the US, the Federal
Reserve has made a consistent policy in 2001 to decrease interest rates by buying
bonds. As a result, the magnitude of small denomination certificates of deposit
(CD) fell from $1,132.0 billion to $1,118]. The drop is even more pronounced for
large denomination CD’s. Large denomination CD’S, those with deposits of
$100,000 or more, fell in absolute value from $560.9 billion to $491.7 billion. a. Use the model of asset demand to explain this phenomenon. b. Expanding upon your answer to part ”4.2a”, would thisdrop in the size of
certiﬁcate of deposits be productive or counter productive in the Fed’s attempt to increase the size of M1 ? YOUR ANSWER TO SECTION FOUR SHOULD BEGIN HERE
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